The Pomp Podcast - #364: Nelson Chu on Digitizing Private Credit Markets

Episode Date: August 19, 2020

Nelson Chu is the founder and CEO of Cadence, the leading digital securitization and investment platform for private credit. He is a 3x startup founder with several years of experience at the top investment management firms, including Bank of America and BlackRock. In this conversation, we discuss the private credit market, the pros/cons for each market participant, how it got so fragmented, what Cadence is doing to solve the issues, how they have been impacted by the pandemic, and what future products Nelson is interested in building. ============================ Crypto.com is the only all-in-one platform that allows you to BUY / SELL / STORE / EARN / LOAN / INVEST crypto all from one place. Join over 1 million users currently using the Crypto.com app. Download and earn $50 USD using my code ‘pomp2020’, or use the link https://platinum.crypto.com/r/pomp2020 when you sign up for one of their metal cards today. ============================ Coinbase Wallets are adding support for .crypto and .zil domains through their partnership with Unstoppable Domains. Unstoppable Domains provides an all-in-one solution for blockchain domains. You can send money using these new domains instead of long Bitcoin wallet addresses, while also storing your domain in Coinbase's collectibles section. Go to unstoppabledomains.com in the dapp browser to register and manage your domains.  ============================ Pomp writes a daily letter to over 50,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Nelson Chu is the founder and CEO of Cadence, the leading digital securitization and investment platform for private credit. He's a three-time startup founder with several years of experience at the top investment management firms, including Bank of America and BlackRock. In this conversation, we discussed the private credit market, the pros and cons for each market participant, how it got so fragmented, what Cadence is doing to solve the issues, how they have been impacted by the pandemic, and what future products Nelson is interested in building. I really enjoyed this

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language while sharing my opinion on various aspects of each industry. You can subscribe at pompletter.com. Again, pompletter.com. All right, that's it for today. Let's get into this episode with Nelson. I hope you guys enjoy this one. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. Got Nelson here.

What's going on, man? How are you? Glad to be here. Absolutely. Thanks so much for joining us. So for those that don't know, Nelson runs a business called Cadence that my partners and I invested in. We're super, super excited about what they're doing in the private credit space. So before we talk about that though, let's start with just your background. Maybe talk to us about where'd you grow up and kind of how did you eventually arrive at spending so much time in finance? Sure, absolutely. Probably too long in finance at this point. But no, I was, I grew up in New Jersey, so kind of really close by. I have stayed in this area my whole life. So first thing out of school, you know, it was what,

oh eight or nine ish i decided to get a job in finance because clearly that was a brilliant idea at the time uh and i was there at merrill lynch for the last two months of merrill lynch's life before we came bank america so that was fantastic uh left that uh thinking you know everyone's saying do the buy side buy side so much better than sell side so i joined the buy side joined blackrock uh realized that the buy side was probably not better than the sell side and it wasn't really that great to begin with sell side wasn't that great either so uh left that thinking you know, I had the opportunity to do my own thing. Let's try it, see how it goes. And what ended up being my own thing was really launching a strategy consulting firm that helps

startups build and ground up. So I had a lot of good case studies there. Some of them were your portfolio companies as well. And, you know, realized that I was able to kind of give these founders advice on how to build companies, had a team that knew how to build products, knew a bunch of VCs, realized that, you know, for the right idea, the right time, I should probably do it myself. And so that's really how Cadence came to be. Dabbled or went into private credit because one of our clients at the time was almost like a private credit lender. And we saw the opportunity there and we kind of extrapolate out a broader vision from there. So yeah, very short three-year stint in traditional finance,

but a very long time in startup finance. For sure. And where did you start to kind of pay attention to this space specifically? And what was the impetus for actually starting a business to solve the problems you guys are going after? Yeah, it was crazy. So that client that I mentioned who was with my old consultancy, they were factoring purchase orders, right? So they were basically saying, Hey, you know, Costco wants to buy this from you, but you need money to be able to even manufacture those products because you're a small up and coming gorilla bar company or whatever. And so I will take a haircut of 6% off your total sale, recognizing that your margins are 50%. And so it's going to be fine for you. And you can actually manufacture the products,

I get my 6%, you get your win, and then you actually can, you know, everybody wins in that regard. So that was a really interesting opportunity. We realized that private credit and this type of lending is really what powers the kind of the global economy, because it's not the banks, not anymore, at least they do. They're very specific, very large institutional deals. But in terms of Main Street, mom and pop shops, this is where it actually gets done. And that was fascinating for me, at the very least. So we saw the opportunity there. But as we dug deeper and deeper into it, we realized how broken all of private credit was.

There was no transparency. There was no data around it. There's no ability to verify any transactions. It's a pretty opaque market, somewhat intentionally. And so if you have the opportunity to really bring that level of transparency to the market, you can be and facilitate the most efficient market possible in a market that desperately needs it. And so we saw that opportunity and realized that this is the one we want to make a business out of. Let's elaborate a little bit on private credit. I think people probably have

heard that term before. I've had a couple of people who've come on and they're kind of more investors in that space, but we didn't really get into like, what exactly is private credit? Yeah, it's a bit of a catch-all actually. So you have private capital markets as a whole, which is not your traditional public stocks, bonds, et cetera. So within private capital markets, it's a wide mix. You have private equity, you have venture capital, you have real estate, infrastructure, and you have this catch-all called private credit. And so private credit encompasses a variety of different things, but think of it as like small business lending, consumer loans, factory receivables, all these things that are just in kind of like the lending

space that are smaller dollar. It's really what encompasses private credit, but it touches every single thing that you do on a day-to-day basis like that example i gave you earlier for that um that lender to granola bar companies i mean you know the stuff you see at whole foods pretty much like all of them have gone through some sort of private credit transaction to even get that onto the shelf if they're not kashi or something like that and so that's really where it's a tremendous opportunity it's a massive market it's growing about i think a 20 compound annual growth rate since 2000 um it picked up during 0809 when the banks stopped lending to this side of the business. It's definitely picked up during COVID when the banks extra

stopped lending to the side of the market. So that's been one that's been an area of significant growth. But like I mentioned earlier, the transparency part is a huge problem. So of that trillion dollars, about $400 billion is sitting in cash, waiting to find deals, deploying the deals, if they can literally just have a solution for them. And that's really where we come in. Got it. And so the people who are offering these opportunities, you mentioned small businesses? Maybe just talk a little bit about who's taking on the debt and what types of businesses are they in? Why are they coming to this side of the market rather than maybe pursuing other types of capital financing? Just elaborate a little bit on that.

Yeah, sure. So if you go up the chain here, so the small business itself generally needs capital to grow. It's pretty standard. It can be backed by, it could be a secured loan, it could be an unsecured loan. If it's a secured loan, it's usually off of a personal guarantee of the the founder of the company uh or it's like their house or something like that if it's unsecured it's just based off of the um the revenue that they're projected to receive coming up over the next couple months so these businesses on a regular basis need to take a loan out to be able to have working capital when things take longer to pay out and things like that so they usually go online they google it because their bank probably won't lend to them at this point these

days uh and they find the various different you know most of them are fintech companies actually who kind of cover this space, your on-deck, your cabbages, things like that on the small business side. So they go to them and they say, hey, you know, I need a loan for X dollars. This is my financials. This is how I've done over the last couple of years. How much can you give me? And the lender looks at their client prospective borrower and says, okay, I can give you this amount and let's call it a day. What people don't know is that the lender itself actually needs to get money themselves as well to lend out. And that's really where this entire private credit market is coming from. So the lenders themselves source capital from a variety of different places.

It could be hedge funds, it could be credit funds, it could be family offices, or even when they're really small, they're actually lending off their own balance sheet. So a lot of fintech startups who are backed by VCs to get off the ground, they are their first source of capital. It's very, very expensive. So the ecosystem that we're helping facilitate is basically getting the lenders the most probably flexible, cheapest cost of capital they can get and provide it at every single phase of their growth. Because the lenders ideally grow from being a small lender to a midsize lender to ultimately one that the banks can be the ones providing capital. And that's really the holy grail because it is the cheapest they can get.

I see. And so based on what you've told me, and I'm cheating because obviously we did really, really deep analysis on space, there's just a lot of fragmentation, right? So it just feels like there's people who want to give money. There's people who need the money. Those two people have a hard time finding each other, talking to each other, sharing information. Maybe just talk a little bit about why has no one solved this yet? Yeah. So a lot of it is coming down to the fact of like right place, right time. So you had the last couple of years have been fantastic for FinTech.

And FinTech on the infrastructure side, specifically, we have all these companies building the pipes to better understand and analyze the data coming out of everything. It's any transaction you're doing on the money side, right? So whether you're paying for something at a point of sale cash register, or you're trading online,

or your bank account balances, like Plaid, Diwala, Stripe, all these guys have come out in the last couple of years and made it significantly easier to actually capture and analyze that data in a very standardized way. But no one's actually kind of taken the effort to pull that all together and move that into part of the underwriting process to be able to actually aggregate all that information,

understand and have a holistic view of a borrower, of a lender, whoever it is, and be able to provide it in a way that facilitates true capital markets transactions. And it's just kind of taken time and time to mature to be able for it to get there. And so we came out in mid-2018-ish, probably still a little too early for all this stuff, but we took the time to build out all this infrastructure that we needed to do on our side to be able to actually provide that information to help both sides find each other. So if a lender can provide all the information they need to a third party, that third party can package it up in a way that is very institutionally friendly for these people who provide the capital to actually diligence, find the deal, and ultimately make an investment. These are things that we take for granted in public markets that simply never existed in private markets, especially not in private credit.

And so that's really where we're coming in. we're taking all this financial fintech infrastructure and pulling it together to be able to create the standard for all things private credit. Got it. And so maybe talk a little bit about where you started, like what did the product look like? And then how has that evolved over time to today? Sure. So what was our first initial vision for the company was just what you see on our website right now with cadence.io. So it's pretty much a fairly standard conventional alternative investment marketplace. You have the ability to sign on. You can see various different

opportunities. I'd like to think that we have one of the cooler mousetraps on the street when it comes to alternative investments. It is the shortest duration investment products on the market. So we have one month, three months, six month investments. We have probably the comparable yields to everybody else on the market in the range of eight and a half to 15% these days, which is still pretty good considering your cash earns nothing in a bank. And you also have the lowest minimum. So it's actually the lowest bar to entry to just try it out. And so that's allowed us to grow pretty quickly on that front.

That was the initial vision. And then as we start to see, wow, these lenders have a whole lot more problem than just capital. They have, you know, a whole situation of either not tracking data or not tracking data and presenting in a way that's amenable to institutions. Like they were hampering their own growth simply because they didn't know any better, right? they don't have capital markets teams dedicated towards getting them cheaper capital as they get bigger and bigger. And so that's really when we decided to dig deep into what the underlying

problems were and realize that if we can create, call it the central source of truth of asset performance data for all these various lenders that we work with, we can help them get from every single phase to the next phase of their life in a very institutionally friendly way. And so the business has evolved dramatically from being a pretty conventional alternative investment platform that is comparable to other ones you can find out there, uh, to really a capital markets company, um, which you don't really see much of on our website. If you were to just take a look. Got it. And where did you find the first, uh, you know, businesses to come on and the first investors, like talk to me about how did you actually get in a marketplace where

cat, you know, or what comes first chicken or egg, right? Like how did you actually get one side of the marketplace on, on a board first? Yeah, the chicken kind of gave birth to the egg the same exact time for us like it was like almost like simultaneously but uh so we first you know we had some clients in the private credit space for my old consulting company right so we knew that'd be a good starting point uh we had a bunch of people who were friends family that worked in finance that kind of dabbled in this space before so we basically just reached out to everybody and tried to see who's a good lender who's a good uh potential investor and we said if i can make a product for you uh that you could just invest in very quickly very easily uh would you invest in

And they said, yeah, I mean, if it's a month investment, I'm glad, and you're getting 12% APY, I'm glad to do that. And so we basically ran all the various different originators we had at that point in time through a pretty strict underwriting due diligence process. and the one that passed was when we stuck with which is which has been a fantastic story here they're in the amazon merchant working capital financing space so basically if you're an e-com merchant on amazon they'll give you capital based upon how much they project you to sell over the next year and you know they can buy inventory with that they do whatever they want they can grow with that so that was our first one did fantastically well and on the investor side we had a couple months to build up a user base of investors that were honestly friends and family we just kind of add them all to the list, but also people who signed up from some of the direct

marketing efforts that we had, we were able to close deals. So at January, 2019, we launched our first private beta deal. It closed in a couple of days. We thought, wow, there's people that actually, you know, gave us $250,000 to invest in this. And, you know, a year and a half later, we're doing 130 million and, you know, it's, it's grown very quickly from there, but I will always remember that first time when someone wired us money and I was like, we might have a business here. So yeah, it kind of came together all at the same time. We're very fortunate. And obviously, that original marketplace is still going quite strong. But now you've got a SaaS product as well. So maybe talk a little bit about kind of what this product is and how that originated or came. Sure. Yeah. So it's, you know, our vision is to have that central source of truth of asset performance data, right? So at the end of the day, what that means is, we need to provide tools, workflow, all these things for lenders to be able to actually better access capital markets.

So this first SaaS product is designed to essentially facilitate the servicing and surveillance that we're doing on their data. And so they're paying us a monthly fee to be able to actually have our team go in there and essentially package up and understand, analyze, ingest, aggregate, whatever you want to call it, the data coming through and be able to present that to investors. Because ultimately, the more transparency you give, the more comfortable investors are with your product, and the more likely they're willing to take a lower return because they have visibility into performance. So that launched at the end of June. It was really successful. I think most of our originators actually were onboarded immediately from there. So it's a great starting point for a SaaS product. And the expectation is that we can broaden that to not just the existing originators

we have on the retail platform, but just as a general lender product at the end of the day. Got it. And so help me just get a sense, whatever you're comfortable sharing kind of publicly, where are you guys right now, right? And we've kind of talked about the product itself, but from a data standpoint, where are you so far? Sure. Yeah. So about three quarters of our originators were able to actually capture, ingest, and analyze and present the data on pretty much a daily basis. And so we actually make that available to any investor on our platform. They can see it every single day. COVID probably accelerated some of our efforts on that front because you had to really get a deep understanding of how these products were performing and how these lenders were performing.

in order to figure out whether you continue to extend them capital or not so the good news is overall they emerged relatively unscathed for the most part which is fantastic and it was through the data that we were able to say okay you know we can continue with this program we can keep it going um and if it didn't show that we would be able to stop it so that inevitably um you know the short-term nature of our program allowed us to do that so i would say from a workflow standpoint we've gotten pretty good of an understanding of what you know small business lending data is supposed to look like, what consumer lending data is supposed to look like. Now it's just a matter of continuing to push the envelope on what it takes to automate it,

what it takes to make it more efficient, and what it takes to really create workflow around it. And that's really what we're doing with that cadence sync, that lender portal. We're launching features every week. We launched one, I think, last week around just overall documentation of all the various different things that we have going for them. So it is very much an iterative process, but we're making it more valuable every single week that we ship out new features. Got it. And as you're kind of building this, you went right into the teeth of a global pandemic and an economic recession. I think that there's probably more people who thought we're late stage of a bull market. And so this

thing's going to turn over at some point, but no one really knew when or how severely. I don't think very many people at all could predict the global pandemic. So how has that impacted the business either positively or negatively? Yeah, I think it's overall for the positive. It does force your hand in a lot of ways. You need to react very quickly. You need to adapt. So like I mentioned earlier, we did launch our accelerated surveillance reporting for more lenders than we would have normally. So pre-COVID, we had two lenders out of 12 that had surveillance on a daily basis, and we ratcheted up to nine, basically. So that was just the only way we were able to get comfortable with it. But another feature that we had been planning on launching

for a while, but just kind of was on the back burner, we're closing deals without it, was the Dutch auction. So that was a big deal. So that came out pretty much right as COVID hit, because in that timeframe, stock markets were crashing, everyone was getting margin called, they need to pull out cash. We were the only, I think I would say probably one of the only platforms that basically every dollar that wanted to go out, went out the door, right? So we knew that we had to make up for that shortfall somewhere. And so the truth is, at every asset has a price that a buyer will come in at, they just need to figure out what that price is. And that's really what this Dutch auction intend to do. So how it works very simply is, let's say you have a lender that's

willing to take basically call it 14% cost of capital, right, that's their maximum, we can go out to our investors and say, Hey, you know, if we go out with 12%, how much are you willing to invest. 13%, how much are you willing to invest? 14%, how much are you willing to invest? And if it's a normal conventional investor, they would say, I'm willing to do 50 grand at 12%, 75 grand at 13%, 100 grand at 14%. And if your originator needs a million dollars, you figure out at which percentage point do they get a million dollars, basically. So when COVID happened, well, unfortunately, everyone put the top line, 14% every single time. That was the only way it was going to clear. And so everything ratcheted up in terms of yield from like 12 to 16 to 8 to 12,

whatever it is. But the beauty of this is that as the market stabilized, everything came down, right? Because they were performing, they were delivering. And so what was originally 12 jumped to 16 is now back down to like 13. And that's fantastic, right? Because we were actually still able to give out capital when during that time, everyone was cutting back. So the pandemic forced our hand in that regard. But outside of that, we've seen investor demand increase dramatically as things have started to be a little bit more clear, right? So the stock market has defied all expectations in terms of how it's doing. And so people are getting a little wary. They're like, how long can this last? We're seeing all this other negative news out there, and it's got to

come down at some point. And so people are looking to diversify. And so the same way that crypto is diversification, having Bitcoin is diversification as a hedge against inflation, Private credit is also diversification. It's uncorrelated. Whole Foods, for example, is still going to pay that granola bar company 45 days later, as per usual, but it's not going to be a situation where they're going to default on that. And so it doesn't matter if the stock market goes up, stock market goes down, that's still going to be there. So being able to provide investors that level of diversification, we've seen a lot of flight towards our assets and our investments as a result. I see. And so as you go through this,

how important is your access to what I'll call near real-time data? That's one of the things that to me was so impressive is if you're in a normal scenario, normal marketplace, that data latency makes it really, really hard to be reactive to changes in the market. Whether those are monetary policy stuff, whether that is background economic stuff, just like there's latency of information and therefore literally there's just latency in response time. When you have near real-time data, you can actually respond really, really quickly. And so you just described kind of the whole idea of seeing movement in the yield, but talk a little bit more about like how are you getting access to that real-time data and then how important has that been in all facets of

the business? It's probably been the most important thing, right? So when you think about all these different agreements that get drafted for, you know, if you don't have X dollars in your bank account, then you owe us this money, right? That sort of standard, you know, agreements that are line items in an agreement as part of any lender to, or financier to a lender. If you don't have visibility into the bank account, then how are you going to verify that? You're going to go off their word? I mean, that's basically what it was for a long time. For the actual borrowers themselves who need the capital from this lender. If you can't physically pull money from that bank account, and you have to wait for them to send you checks or something like that, how are you

going to verify that? Or if you have to wait for them to wire it to you, it's crazy. That's really how the industry was for a very long time. So with all this kind of advancements in FinTech infrastructure, it's been able to facilitate a lot of this and improve a lot of it. So the data is pretty much the core and most important thing to what we do. It allows us to ensure that they're always compliant. It allows us to make sure that it's performing as we expect it to. So this daily surveillance reporting that we create guides every single decision we need to make. And it was extremely important during COVID when everyone's portfolio was out of whack, basically. So it's like, how fast is the portfolio deteriorating? If we can extrapolate it out, like in 90 days,

by the end of this note, what is it going to look like? Do they have enough cash to cover? all these things are things that we can see daily and so we can react daily and we can get ahead of it that's the biggest thing uh private credit before was almost like a set it and forget it type investments like i'll get my quarter end reporting and hopefully it's accurate and then if it didn't go well then i'll have to go you know withdraw money in the actual redemption window and if i miss that then i can't get it out and so that's that's like baffling to me when everything is happening in real time today so we're here we're trying to change that and make that data available so that people can actually make educated decisions around these investments.

And you can even mark to market your portfolio on your own based on the actual underlying performance, which you would never be able to do in private credit normally. Absolutely. And this kind of is a nice segue into this fat brands deal that you guys did. I remember when you first started telling me about it, I was like, wow, that's a pretty big jump from kind of smaller credit opportunities, right? To what ended up being tens of millions of dollars. And you said one specific thing around this data that just blew my mind, which was, no, we can get near real-time or whatever the terminology you used was, on a location-by-location basis, exactly what the revenue is in each location per day. And I started just thinking like, wow,

that is a game changer from being able to monitor the performance of an asset like this. And so just give us a high level of what was the fat brands deal? How did you guys find it? How did you win it? And then kind of how did you actually execute this? Sure, absolutely. So Fat Brands is the parent company of a much more well-known thing that people may recognize, which is Fat Burger. So they own a couple hundred franchises amongst a couple of other things like, I think, Hurricane and Ponderosa and things like that. So it's an aggregator, a Yum Brands, if you will, or an aspirational Yum Brands. And they've done really well to be able to kind of group all these brands together. But they were looking for a growth

capital they wanted to actually you know take their company to the next level um and you raise debt for that basically that's like the easiest path towards that and so they came to us because the size is small like this you know the banks normally do 100 150 million dollar deals and crowdfunding platforms do 10 million dollar deals and so this kind of sweet spot of 40 million bucks it's like who really covers that space um because it's you know cost prohibitive for a bank and it's probably too big for some of the smaller guys out there and so we stepped up to the plate and we you Our vision was always that we can graduate lenders from retail to institutional, so might as well cut our teeth on one of the hardest transactions you can do, which is a rated whole business securitization, where every single dollar coming out of each franchise's royalty gets distributed out to investors in some sort of waterfall. So we were able to successfully close that because, you know, we were a up and coming young company that had aspirations to get bigger.

They were willing to take a chance with us. And we were very cost effective from a fee standpoint because our overhead is significantly lower than a bank. But, you know, without a doubt, they definitely took a chance and believed in us and we owe them a lot for that. So we're very grateful. But yeah, to your point, you know, this is why companies like Square and Stripe are so powerful, Because they're actually clearing transaction data on a regular basis. They have all full visibility into how each machine, each POS is doing or each store is doing. And so in the same way with VAP brands, if they have upgraded registers, you can actually pull that information on a regular basis and you can see how it's doing. And so you can start to make decisions around, you know, whether they are in compliance with the actual agreement that was set in place as part of issuing that debt. And yes, that's been a great transaction for us. It kind of put us on the map. We're actually the number 25 largest U.S. structuring agent of asset-backed securities in the first half of 2020.

So there are no startups on that list. So we feel very fortunate. And we are one above Stifel. So we'll take that all day, every day. But yeah, more to come on the back half of this year. we were able to leverage that trade to be able to kind of prove ourselves and make a name for ourselves in the industry. And we've gotten a lot of inbounds as a result of that kind of playing in this call it $1,500 million sector that no one actually covers well. It's a great opportunity for

us to slot in. What was the biggest thing you learned from doing that transaction? So either biggest thing you learned or maybe the biggest surprise? I think there's a reason why banks don't do it. It's a lot of work. It isn't definitely a lot, a lot of work. And so I can understand and see why a bank, which has, you know, significant overhead costs, I had to count they have to maintain for that type of fee structure at a $40 million level. It probably doesn't make a ton of sense, right? So I can totally see why that's the case. For a seed stage startup, it's great for us. We can take that all day, every day. That's why it worked out. But yeah, the team came together and it just really pushed to be able to get this thing done. But it

was what normally would be a half dozen people. We had two essentially. So that was a learning lesson for us, but it was good. It was well worth it. And obviously it sounds like you're looking to do more of those types of deals. Yeah, absolutely. So we have 12, 13 lenders now on the platform, on the retail side. A couple of them are ready to graduate. And so we are going to be going out to market with a few of them at the institutional level. And that's a great case study for us to show how originators can progress from one stage to the next. But we have, you know, a couple others that came through because of that, that brand's deal who need the help or sub a hundred million dollars who believe that, you know, there's a chance that

we can help them get the capital they need at the terms that they're looking for. So we're pretty good on that front. We're excited for, you know, what, what will happen in the back half of 2020 as we kind of close some of these big ticket ones out. Before we get to what the kind of future of Cadence looks like, what's the pitch to investors, whether they're individuals or they are institutions? Like when you go out and you talk to them, it's pretty obvious like why originators would want to do this, right? They get access to a pool of capital and it can be cost effective for them to do that

and kind of very clean and kind of a technology enabled or data driven way. but what's the pitch to investors? What's that conversation like? Yeah, absolutely. So the ability for you to get access to private credit, especially a small investor, is pretty unique. So normally, it's like a half million dollar minimum, generally, right? And so the average investor, even their accredited or family office doesn't necessarily want to put that much in one deal. So for our products in particular, especially on the retail side, you have the ability to get access to effectively institutional caliber, institutional grade deals at a lower minimum than you would normally see elsewhere. You get that diversification

that you want away from equities, away from other things you may have in your portfolio for consistent returns. And you also have the ability to actually verify how it's doing with the data that we have. When it comes to more of the institutional investors, it's really kind of that history that we've built with these lenders, right? So they're always looking for high quality deals. If you can give them and be a consistent source of high quality deals, that's fantastic. But the difference here is that we've, you know, probably worked with this lender for months, if not years, right? So we have that history there.

But we also have the data around how they're performing. And we also have it presented in a way that every single deal you ever see from Cadence has the Cadence format, right? So the small business loans always look like this. So if you've done it once, it's very easy to do diligence on it again. Consumer loans always look like that. If you've done it once for that, you can always do it again and rinse and repeat. So the time it takes to source and diligence a deal

goes down dramatically. And a private credit portfolio manager spends about 85% of the time sourcing diligence, not actually portfolio managing. So the ability for us to be able to shorten that dramatically means they can actually do more of their job that they actually enjoy and put the money to work. And the truth is, this is the $400 billion burning hole in their pocket, right? They have to allocate this. They need to find opportunities. We can give it to them in a scalable way and help them actually put real dollars to work. So just being able to get in front of them is something that they'd appreciate for the types of unique, high quality products that we have. For sure. And then one of the things that is fascinating to me is the

performance of these, right? A lot of people would look and say, okay, there's a startup. So how good can they be at underwriting this stuff and kind of finding high quality opportunities? The other argument is, wow, they got a lot of data. And if you got a lot of data, you can be great at it. uh you guys have tended to do much better than most but talk a little bit about you know defaults and kind of the quality of the opportunities and maybe even some of the retention of the investors or they've invested and come back again yeah for sure uh so the the truth is um everyone that we've hired from the capital market side came from traditional finance right they've actually done asset-backed securities generally or they've been from ratings agency or something like that

and so they have an institutional lens whenever they look at something like this and our products reflect that right we have a lot of institutional grade um features and bells and whistles in there that you normally would expect in a traditional abs that you would never expect on a call it a retail deal if you will we try and layer that in to be able to give the investors that protection because anything that we put on our platform we have to be and we are confident that we put our own money our own family's money into it and honestly they have so um that's that's we kind of, we put our money where our mouth is in that regard. So when it comes to the actual structuring, we've been very fortunate that throughout COVID, partially because of the

short duration nature of our products, we can, we were able to reprice, resize, restructure during COVID. But also because the data, we were able to see sort of situations arise if they were about to arise. Our default rate is about a little over 2%, which is pretty much like the lowest in the industry at this point. Do you have other places that are in the 15, 20, 30% range? And it's because they get caught out when you have super long dated products, like three years, four years, five years, you can go through an entire recession in five years. And you know, you would never know what happens to that product if you don't have the data around it. So by keeping it short, we protect and we have the ability to actually hedge against potential risks that come out that we may not be

able to foresee. So yeah, all those things together help to create pretty much, I would argue, one of most competitive products out there. Real institutional caliber deals made available at a retail level. And we stand behind it. We put our money in all of our deals, basically. And we actually just also brought on board a new head of risk, who is actually the former head of asset-backed securities and CLOs at Morningstar. So bring another, one more layer of institutional experience to the table. And he's already done even more to kind of make this even more institutionally at institutional S. So yeah, we're pushing the envelope on that front.

And there's a good reason for that. If our retail deals are more institutional-like, then that means that when they go to the institutional markets, they're already institutionally ready. So everything we do on the retail side is designed to translate to that side. You're speaking like you've got some common sense there.

That's rare sometimes in business. Let's talk about the future of Cadence. You've built an awesome platform, right? Obviously, we're super excited, wanted to get behind it and invest. We think that you've built a great team. Where do you go from here? What is kind of the goal or aspiration and kind of the path to get there? Yeah, our goal is to fundamentally transform private capital markets for the better, right?

Everything should be made more efficient. Everything can be done better through data. And so we put our flag in the ground for private credit as a starting point because we thought that was probably the most opaque asset class out of all the private capital markets opportunities. And it's also the one that has the most demand. So if we can do that and we can facilitate capital markets transaction on that front more efficiently, then we're in really good shape. So really our job is not to be an issuer. Our job is not to be a structure. Our job is not to be a bank. Our job is to really create, create and deliver software services and solutions

for various different stages of a fintech lender's growth and for all the different transaction parties involved who can actually make something happen here. And if they can do that, then we did our job. Yeah. What do you think the biggest obstacles to get there would be? Probably sourcing of assets, inevitably, I think. There is a fintech lender for everybody out there,

but it's a question of how good they actually are. And so we need to basically provide and create something that has and gives us the widest funnel possible and the fastest ability of diligence and figure out where they fit in the funnel, right? Like, do they fit with our retail platform? Do they fit as a direct matchmaking deal? Do they fit as a institutional deal or they fit straight for the banks? It really depends, right? So if we can create software around that to be able to capture the entire ecosystem, then we have that advantage, right? So we can then pick and choose to work with from there.

That is a tall order, given the amount of data that needs to be synthesized and the amount of companies that are out there. But it's what we're setting our sights on right now. For sure. And then the last question before we get into some of the rapid fire stuff is when you look at what you guys have built so far, is there anything that you say that's been the single most important thing that we did, but we didn't anticipate that beforehand? So kind of like what have you guys surprised yourself with in terms of some part of the business, whether it's the business model, a piece of technology, whatever, that you guys created or built, but you didn't realize how important it would be until it was actually in place? Yeah, I think we accidentally stumbled into it, I guess. So the whole concept of the short-term note program was the brainchild of our head of capital markets.

And it was because he came from an institutional background. He was at UBS, debt capital markets, all that. And he realized that, you know, no one, everyone else was doing super long-dated products. And we happened to just focus on our first originator, first few originators were all short-dated anyway. So he said, why don't we just make this shorter and see how it goes? And then we were able to very quickly get investor interest because we got all these inbounds coming and saying, hey, no one else is doing something that's short. This is fantastic.

I get liquidity. And they were basically telling us our value props. I was like, oh, OK, well, I guess now we know what works. And that really has helped us differentiate ourselves out there with the rest of the market. So think of it as like a commercial paper desk for a fintech lender, which is unheard of because CP is normally for like GE or Bank of America or any of those guys. we're giving it to a fintech lender who is a very early stage. That was great for the lender, great for the investor. And it helped us solve that chicken and egg problem very quickly because

everyone realized they were all on the same page and they wanted the same exact things. Yeah, that's awesome. I asked the same two questions to everyone to wrap up and then you'll get to ask me one. The first is, what is the most important book that you've ever read? so this is uh probably one that has had a lot of impact on our company as a whole and it's required reading uh but measure what matters by john door so it's uh it's a fantastic read i think you know having us having all worked in corporate before we realized just how painful the lack of transparency is and lack of accountability is for a company and so when you have the ability to get everyone on the same page and everyone understands how they fit into the broader

piece of the puzzle and they have a say in how they shape what the quarter is supposed to look like or what the year is supposed to look like. It's incredibly powerful. So we've iterated on and made it our own in a lot of ways, but it serves as the framework for what we do on a day-to-day basis to ensure that everyone is doing what they're supposed to be doing. And you don't need to micromanage. If they're delivering what they say on that front, then we're going to have a great quarter. So that's been a very impactful book for us as a company. That's awesome. More fun one is second question, aliens, believer or non-believer? I think it's very egotistical to think that there are no aliens out there and that out of all the galaxies you see in the sky and all

the planets and stars, we're the only ones that are out there. So big believer in aliens. I hope that I'll be alive when we see our first one, but it's tough to tell given the way things are going right now what's your take on all the ufos uh interesting i you mean what the pentagon released or those those videos so those are the uh official releases but it sounds yeah exactly there's more and more uh ufos being seen every day now yeah um i think the official releases are probably i don't know government like you know next gen technology from maybe a different government but But yeah, it'll be interesting. I think some of those have to be real at some point.

It's just from a pure probability standpoint, they can't all be fake. So yeah, I'm a believer. I love that. At some point, they have to be real. That's a great way to look at it. You could ask me one question to wrap it up here. What question you got?

Sure. uh where do you see um the market cap of bitcoin versus gold in 2030 oh this i just tweeted this uh i think that bitcoin will have a larger market cap than gold for sure by the end of the decade um now somebody was asking me recently is that because i think the bitcoin market cap is going to increase or because i think the gold market cap is going to decrease uh obviously i think that it is uh um more so that the bitcoin market cap is going to increase than gold's going to decrease uh but but look there's an argument to be made that you could have some uh you know some of the market cap of uh sound money enthusiasts from gold leave to go to bitcoin or whatever

um but the uh that to me isn't even like interest like like it's such like a inevitable foregone conclusion in my head uh that the big one is just when does bitcoin eclipse the global money supply and like to me that's the one where structurally it should happen right because bitcoin is a market expanding technology yeah whatever um much harder to nail a timeline uh and if you're talking about 10 years to get to you know gold market cap you basically got to go let's say gold's eight or nine trillion dollars you got to get like 80 90 trillion you got to get like another 10x so like you know you started yeah well you just started talking about like from a 200 billion dollar market cap give or take today to 8 trillion what's that that's uh 40x right yeah so yeah

about 40x they get another 10x you got 400x to get to the monetary supply like that's going to take a while right what do you think yeah i mean i think i don't disagree with you on that i think the question is going to be what is the actual use case and the efficiency of that currency and their own transactional basis to be able to get it to that level, right? I think if it's at today's rate, it's going to be, you're going to see some challenges, but if it can dramatically improve from a technology standpoint to be able to actually be comparable in terms of global money supply, then the acceleration is going to be dramatic in terms of adoption. It's just not quite there yet right now. It's going to take a little bit of time. Yeah. It is definitely,

I think going to be interesting in terms of, uh, kind of what's the path from here to there. Um, but, but I've got pretty deep confidence that, uh, that we know where we're going. It's just, you know, we got to figure out what road we're taking at some point it'll get there as, as with all things. So, yeah, absolutely. So, um, before I let you go, where can people find you on the internet and where can they find out more about cadence? Sure. Absolutely. So our website is with cadence.io. Feel free to check it out. Um, our customer success team was always happy to from you uh you can reach them at hello with cadence.io uh or i'd be happy to hear from you i'm just at nelson with cadence.io feel free to check out any of those places awesome man

well listen thank you so much for doing this uh i'm obviously very very excited about what you guys are doing i think you're doing a fantastic job uh not only navigating private credit markets but also with the pandemic and we'll have to have you back when uh we just got a little bit more progress to share so uh keep going sounds good thanks so much for having me Thank you.